Federal Reserve Holds Rates Steady For Now On Tighter Financial Conditions

Economic data took a back seat to financial conditions in the Fed's policy decision-making at its latest meeting, said S&P Global Ratings in "Federal Reserve Holds Rates Steady For Now On Tighter Financial Conditions," published today.

The Fed held its policy rate steady at a 22-year high of 5.25%-5.50% at its meeting on Oct. 31-Nov. 1. The American economy has had generally stronger-than-expected employment and GDP growth, and inflation progress has slowed since the September meeting.

But still, the Fed was inclined to hold rates because financial conditions have tightened sharply. Equities had been down 8.7% since July 31, the last 25-basis-point hike, and, more importantly, the benchmark risk-free 10-year Treasury yield had risen about 100 basis points to nearly 5%.

Whether the Federal Open Market Committee (FOMC) is done with rate hikes will depend on a few factors--namely, progress on lowering inflation, and the state of labor market and financial conditions. For now, we maintain our previous assumption that there will be one more rate hike of 25 basis points in December.

For 2024, we continue to expect economic growth to come in below trend and inflation to improve toward the Fed's 2% target. The Fed will hold the policy rate steady through the first half of the year, letting passive tightening of real rates continue through disinflation, after the assumed December hike. It's then likely to begin cutting rates in the second half of 2024 as unemployment starts to rise and inflation nears 2%.

This report does not constitute a rating action.

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